Do we want the economy to be efficient?
Economies of scale mean that the largest firms are also the most efficient, at least when measured by profit. But do we want an economy that is largely one of monopolies?
I saw someone online suggest that capitalism was the best system because it lead to an efficient economy. There are too many assumptions there for me to unpack them all, but let me focus for a moment on the question of efficiency.
Is efficiency good? The only way to calculate efficiency is to use some kind of utility function. A common one is "How much profit can be pulled from this firm?" or "How much surplus capital can be pulled from this firm?" There are other ways to measure efficiency, but it always goes back to some kind of utility function. Would you want this? Nowadays researchers are aware of the many places where utility functions fail to deliver the richness and diversity of innovations which can be delivered by novelty functions. A great book on this subject is "Why Greatness Cannot Be Planned":
https://www.amazon.com/Why-Greatness-Cannot-Planned-Objective/dp/3319155237/
They offer examples from economics and biology where utility functions fail to deliver innovation. They somewhat jokingly point out "If you had a billion years to do it, and you bred bacteria for maximum smartness, you still wouldn't end up with humans."
But there is also the issue of what efficiency actually does to an economy. Large firms benefit from economies of scale, and so the most efficient firm is, in some sense, an economy based on monopoly. But if the monopoly is privately held, then all of the benefits of that efficiency will go into private hands, rather than being shared with the public. Indeed, in some sense, if you want a highly efficient economy, you should want a kind of Communist economy, where every firm is a monopoly and the benefits of the monopoly are shared with the public.
Think about a highly competitive industry where there are thousands of firms competing with each other. Every firm has an HR department, an accounting department, a legal department, a sales department, a marketing department, perhaps a warehouse department. Think about redundancy, the repetition, the incredible wastefulness of each firm recreating the same functions as every other firm, plus the incredibly redundant work of having to set up all of the same functions, over and over again, thousands of times. While such a highly competitive industry might produce a great deal of innovation, it is also going to be inefficient.
Given time, in free market economies, the pattern we see, over and over again, is a new industry starts off with thousands of competitors, and for a while that industry is very innovative and very inefficient (we know it is inefficient because gross margins are fat). And then, over time, the most successful firms grow bigger and buy up their competitors, using economy of scales to increase efficiency, while also shutting down most of the possibilities for innovation.
But finally, I'll point out it is a large assumption that a competitive system has to be in the private sector. Although no society has ever tried it, it is theoretically possible to build a society where every industry is highly competitive, full of thousands of firms that ruthlessly compete against each other, but with all of those thousands of firms being owned by the government.
Regarding this:
...it is theoretically possible to build a society where every industry is highly competitive, full of thousands of firms that ruthlessly compete against each other, but with all of those thousands of firms being owned by the government.
Isn't that a bit how the various branches of the military and other government programs (thinking specifically of NASA) work now? In that they are all competing against each other for tax dollar allocations and theoretically have to justify their budgets to the public via our representatives in Congress. In a system that was working properly the various government departments would justify their budgets to the public with both innovation and efficiency, and the public - through their elected Congressional representatives - would allocate more money to the branches and departments that had adequately justified their benefit to society. Theoretically. Of course, what actually happens in our dysfunctional system is that our Congressional representatives are more focused on either giving money to departments based in their home districts (pork-barrel spending) or making sure the private businesses that gave the most money to their campaigns are getting the most benefit of government spending rather than the public. Campaign finance changes would go a long way to fixing that particular problem with our democracy.